Tongue-Depressor Tax Will Harm Jobs, Innovation: Ramesh Ponnuru

Jan. 3 (Bloomberg) -- A year from now, the federal
government will start collecting a new tax on medical devices
from tongue depressors to imaging machines, thanks to the
sweeping health-care overhaul that Democrats enacted in the
spring of 2010. People in the industry say it’s already having
an effect.

In November, citing the new tax, Stryker Corp., whose
products include artificial hips and knees, announced that it
would let go about 1,000 of its workers. Earlier last year,
Covidien Plc, maker of surgical instruments, said it would lay
off 200 workers in the U.S. and move production to Costa Rica
and Mexico. It, too, cited the tax.

Other companies in the field have announced similar
measures -- or plans to expand production overseas but not in
the U.S. -- without mentioning the tax. The sluggish economy is
clearly part of the explanation, but the medical-devices
industry had been a relative bright spot within U.S.
manufacturing, losing only 1.1 percent of its employees during
2007-2008 while manufacturing as a whole lost 4.8 percent. A
study done for AdvaMed, a trade association for the industry,
claims the tax could ultimately cost more than 45,000 jobs.

Medical-device companies employ more than 400,000
Americans. Their wages are higher than the national average. The
U.S. is a net exporter of medical devices.

The tax will change these numbers for the worse. It will be
levied at 2.3 percent of sales; on average, profits make up less
than 4 percent of sales in the industry. The AdvaMed study
concludes, “The new 2.3 percent excise tax will roughly double
their total tax bill and raise the average effective corporate
income tax rate to one of the highest effective tax rates faced
by any industry in the world.”

Raising Health Costs

Richard S. Foster, the Medicare chief actuary, has
estimated that if the tax is passed on to consumers it will
raise national-health costs by $18.2 billion in 2018. Device
makers complain that the tax will lead not only to higher prices
and layoffs but also to reduced research and development. They
also say that when combined with high U.S. corporate-tax rates,
the device levy makes relocation to other countries more
appealing. Ireland, for one, is actively recruiting medical-device makers to move production there.

The main reason Congress included the tax in the health-care legislation was, of course, to raise money. Democrats
wanted the Congressional Budget Office to certify that the bill
would reduce the deficit overall. But why go after one industry
in particular? The justification for this selectivity was that
the legislation would be a boon for this sector. By expanding
health coverage, the new law would increase demand for medical
devices and thus, in effect, subsidize the industry. The tax
was, therefore, a partial clawback of this subsidy.

Stephen L. Ferguson, the chairman of the board of Cook
Group, a medical-device maker based in Bloomington, Indiana,
makes three counterarguments: First, after enacting a similar
law, Massachusetts saw no greater growth in sales than any other
state. Second, a disproportionate number of the newly insured
will be young people with low health risks, thus limiting the
potential increase in sales. Third, in many cases pre-Obamacare
law already requires hospitals to provide medical devices to
uninsured people who need them.

“So it doesn’t increase the number of devices sold,”
Ferguson says.

Asked if Cook Group will respond to the tax by reducing its
workforce, Ferguson spoke carefully.

“You don’t want to say to your workforce that you’re going
to lay people off,” he says. “The tax is going to result in
growth in another location and not in the U.S.; that’s the way I
see the impact on Cook.”

Cook Group is privately held; Ferguson says publicly held
companies will face more pressure to reduce workforce numbers to
placate shareholders, but will be more reluctant to blame the
tax in public.

Bipartisan Opposition

Even some liberal pundits, such as MSNBC host Ed Schultz,
have expressed opposition to the device tax, and nine Democrats
have joined 216 Republicans in the House to sponsor Minnesota
Representative Erik Paulsen’s legislation to repeal it. A
companion bill in the Senate introduced by Orrin Hatch has 19
co-sponsors, all Republicans.

Paulsen is hopeful that more Democrats will reconsider the
tax: “Most of those nine have come along in recent months as
their constituent companies have alerted them to the danger. It
starts in literally one year. So we have time to fix this.”
Right now, though, the tax is caught up in the politics of the
larger health-care bill. Most Democrats do not want to undermine
the new law, and most Republicans want to repeal it outright
rather than remove its most objectionable features.

The Republican worries are especially misplaced. The device
tax has motivated very little of the popular or congressional
opposition to the health-care law. If Republicans succeed in
eliminating the levy, that opposition will remain just as strong
as before. If they fail, then at least their condemnation of the
tax can help make the case that the law was even more
misbegotten than opponents thought.

(Ramesh Ponnuru is a Bloomberg View columnist and a senior
editor at National Review. The opinions expressed are his own.)